15.5 Some regulatory pitfalls

There follow some examples of possible regulatory pitfalls where
the relationship between the basic services provider and the
contract supervisor (or regulator) has become too comfortable, where
it is poor or where it has broken down altogether.

1. By-passing the regulator

On a concession in Latin America, the private concessionaire
bypassed the regulator on a number of key issues in order
to deal with government directly. The credibility of the
regulator was undermined, bringing into question the effectiveness
of the regulatory mechanisms that were in place.

2. Distrust of foreign private management

A management contract in the Caribbean was frustrated due
to antagonism amongst members of the supervising board
to the presence of a foreign private manager. The board
was obstructive, and this impaired the ability of the manager
to perform. The situation led to the ultimate early termination
of the contract.

3. Lack of finance

There was a case when a PPP arrangement, which depended
heavily on the donor money, failed because the promised
donor funding did not materialise due to macro-economic
circumstances. This meant that the operator was unable to implement
the investment programme and hence deliver the performance
improvements it had agreed with the regulator.

4. Failure of the state to fulfil its obligations

The operator appointed for a PPP contract in Africa was
unable to deliver the agreed performance improvements because
the state-owned asset holding company failed to deliver its
contractual commitment to fund the renewal of major plant.
This resulted in financial stress on the operator.

5. Ineffective relationship between
regulator and government or utility
(regulatory capture)

Where a regulator’s sphere of activity is confined to a single
supplier, or where external pressure and accountability are absent,
a regulator can become over-familiar with the interests of one party
or another in the partnership arrangement. With the commercial advantage
weighed towards the operator, the regulator can, by stealth, become
dependent upon the operator for information; this in turn may result
in a perceived “cosy relationship” between
the regulator and the regulated. Such a situation can
arise, for instance, where there is a split between the
organisation responsible for providing bulk water (under
government ownership) and that responsible for distribution
to consumers (under PPP). An example of such an arrangement
existed in southern Africa, where the private distribution
operator depended upon bulk supplies from several
state-owned water boards. Although these boards were
in effect governmental, in reality they operated autonomously
with little regulatory pressure and as effective monopolies
with a free hand in setting tariffs and standards. This
undermined the performance of the PPP operator. Similarly,
in Eastern Europe municipality-based regulators have
been criticised in audits for procedural failings.

6.
Micro management

There are examples where the regulatory/supervisory
body has become too closely involved in the day-to-day
management of the utility, rather than focusing on key
strategic issues such as service provision to low-income
groups. This can introduce considerable additional bureaucracy
for the operator and hampers both the operator’s
progress and regulatory processes. Furthermore, by blurring the role
of “provider” and “client”,
the regulator may reduce its own ability to enforce
the contract.

7. Political interference

There is an inherent danger that political imperatives – for
instance, price pressures – will conflict with the principles
of good regulation. In one example, political pressure was
placed on a concessionaire to serve areas that were not financially
viable, without first allowing tariff adjustments and cross-subsidisation
from other customers to take place. In the UK, political imperatives
have prevailed on several occasions by imposing one-off windfall
taxes on profits, or by encouraging the regulator to zealously
pursue price reduction against the longer-term interests of sustainability
in the water sector.

A pragmatic balance has to be struck between
the various pressures. In the early days of a PPP
regime, the regulator invariably focuses on the following
key issues:

establishing a professional working relationship with the private
operator and a mutual understanding of the sector issues, whilst
at the same time striking a balance between antagonism and
an over-comfortable relationship;

adhering to the legal and contractual powers and responsibilities
described in the law, licence or contract,
but focusing at all times on key issues that affect customers or potential future
customers;

establishing numerical bases for determining whether levels
of service are improving or getting worse;
and

periodically reviewing and updating the operator’s plan
to ensure that it is continually relevant – especially
in relation to connections, expansion and provision
of new services (including those to low-income
customers).